In a situation becoming more frequent, your contractor or subcontractor may seek refuge in bankruptcy, specifically in the relatively new Subchapter V of Chapter 11 bankruptcy. You may be warned ahead of time, or you may simply receive a notice from a bankruptcy court that your builder or sub is in bankruptcy.
What is Subchapter V?
Subchapter V, introduced under the Small Business Reorganization Act of 2019 (just before the global pandemic), streamlines Chapter 11 bankruptcy for small businesses with debts under $3 million. It simplifies procedures by eliminating competing plans and disclosure statements, and allowing debtors to retain equity while restructuring debts. A Subchapter V trustee oversees the process and facilitates forming a plan but does not investigate financial affairs unless directed. Plans must allocate all disposable income to creditors over 3-5 years and ensure creditors receive at least liquidation value. This process is faster, more cost-effective, and more debtor-friendly compared to traditional Chapter 11.
What Creditors Should Expect
Creditors of a construction company undergoing Subchapter V bankruptcy should anticipate:
Debt Restructuring
Creditors (primarily secured creditors) may be involved in creating a repayment plan that restructures the company’s debts, allowing the business to pay back some portion of their debt over time.
Partial Payments
In many cases, creditors might receive only a fraction of the amount owed to them. The repayment plan proposed by the debtor and secured creditors will determine the percentage they can expect based on the company’s earnings and asset valuations.
Priority Claims
Certain creditors, such as those holding secured claims, have priority in repayment over unsecured creditors. This means they are more likely to recover their debts first. Sometimes they are the only creditors receiving a meaningful recovery. You also may need to file a proof of claim to protect your interests.
Potential for Compromise
Creditors may need to negotiate with the company to settle for a lesser amount, or agree to extended payment terms to facilitate the company’s recovery.
Asset Liquidation
If the company cannot generate sufficient cash flow, or if the restructuring efforts fail, there may be a need for asset liquidation to pay creditors. This could mean selling equipment, property, or other business assets.
Impact on Future Business Relationships
Depending on the outcome, some creditors should reassess their business relationships with the construction company, which could impact future work and contracts.
Timeframe for Recovery
Creditors could face delays in receiving payments, as the bankruptcy process can be lengthy, especially if disputes over the debtor’s plan arise.
Legal and Administrative Costs
Creditors may incur additional costs related to the bankruptcy proceedings, which could further reduce the amount they can ultimately recover.
While potential outcomes vary, the specific results will depend on the company’s ability to execute its restructuring plan and the overall financial environment. Creditors may need to remain flexible and patient as the situation unfolds.
Seeking Legal Guidance
To navigate the complexities of bankruptcy law and maximize recovery, creditors should seek legal counsel to ensure compliance with bankruptcy rules and protect their interests. Bankruptcy is full of traps for the unwary.
The attorneys in Perkins Thompson’s Creditors’ Rights and Bankruptcy practice group are here to guide creditors through commercial and consumer bankruptcy, insolvency, and recovery matters. For assistance with these issues, please contact Anthony Manhart.
